Program-related investments are loans and equity investments that foundations provide at favorable rates to support activities that have a direct charitable purpose. Frequently referred to as PRIs, they expand the resources from foundations - and, in the right circumstances, can be even more effective than grants. Any foundation can make PRIs, yet most shy away from them. In this guide, experienced PRI makers walk through the process, offering practical advice at each step - from explaining the concept to your board to structuring and closing your first deal.
Underwriting for this guide was provided by the Ford Foundation and The John D. and Catherine T. MacArthur Foundation.
Brody Weiser Burns. Maintained by a consulting firm specializing in PRIs, this website offers useful case studies and publications on various aspects of PRI making. Matching Program Strategy and PRI Cost, for example, gives sound advice on assessing and managing program and financial risks.Read More »
PRI making requires three sets of skills: programmatic, financial, and legal. Foundations structure those functions somewhat differently, depending on their size, strategy, and internal capacities.Read More »
PRIs are the historical product of the Tax Reform Act of 1969, which, among other things, imposes fines on foundations if they make “jeopardizing investments” — that is, any investment (including any loan) that could imperil the foundation’s ability to carry out its charitable activities. Program-related investments are the exception to the rule. Under Section 4944, private foundations are allowed to make “program-related investments” that meet three criteria:Read More »
PRIs are investments made by foundations in support of charitable purposes, with the explicit understanding that those investments will earn below-market returns, adjusted for risk and mission. The vast majority of PRIs are loans or loan guarantees, and although they are not grants, they count toward a foundation’s payout requirement in the year a disbursement is made.Read More »
The best way to learn to make PRIs is by doing it. As the executive director of one new PRI-making foundation put it, "It comes from experience, and the only way you can get experience is to make some investments." PRI makers seem to have gotten into the PRI pond in one of three ways: they jumped in, they waded in, or they were thrown in by circumstance.Read More »
Taking on too much risk by going it alone. Funding a project independently, rather than collaborating with others or working through an intermediary, can make for hard going if a project turns out to be poorly designed, or the project developer lacks experience, or the assumed market fails to materialize.Read More »
Early-stage analysis. “We have a document request list that we give to the grantee or the organization. We try not to have them generate anything new for us at this stage. Is this a deal that we’re willing to look at further? Does it pass some basic thresholds for feasibility? Does it really manifest the program interests of the foundation? Does it satisfy basic thresholds for charitability — in other words, is it legal? Does it offer some reasonable chance for repayment — is it financially feasible? Assuming we come up with a yellow or green light, we develop a list of questions that the due diligence process should be addressing. I’d say about 60 percent of the potential deals make it through this phase.”Read More »
There are no hard and fast rules governing PRI interest rates, but there are some guidelines. The important thing to remember is that, in order to meet the IRS charitable purpose requirement, a PRI must generate below-market returns on a risk-adjusted basis. There are two general approaches to calculating interest and returns:Read More »
In some circumstances, the foundation has “called” its collateral, which could be in the form of real property, general liens, or cash collateral. In other cases, the foundation has restructured the loan to extend the repayment period or accelerate repayment.Read More »
Not long ago, for example, a family foundation began looking at PRIs as a way to extend its long-standing commitment to fighting poverty in low-income communities. For over a decade, the foundation had focused on building leadership and capacity among the small, grassroots organizations in its grant-making portfolio. After making a few grants to help organizations develop revenue-generating enterprises, program staff began to wonder if PRIs might help them build up their credit histories and business skills. At that point, grant makers reasoned, the organizations would have access to more capital than the foundation could provide with grants alone.Read More »
This guide was written primarily for foundation executives, grantmakers, and donors who are interested in getting started with program-related investing. You may find it especially valuable in some of the following situations: